Vince Nardone: Tax and Controversy

New Rules in Place for Paid Tax-Return Preparers - IRS Announces

Vince Nardone of Nardone Law Group, LLC discusses the IRS’ recent news release 2010-1, dealing with paid tax-return preparers. 

According to IR 2010-1, the Internal Revenue Service kicked off the 2010 tax filing season today by issuing the results of a landmark six-month study that proposes new registration, testing and continuing education of tax return preparers. See the attached study in pdf format.  According to the IRS, with more than 80 percent of American households using a tax preparer or tax software to help them prepare and file their taxes, higher standards for the tax preparer community will significantly enhance protections and service for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term.

To bring immediate help to taxpayers this filing season, the IRS also announced a sweeping new effort to reach tax return preparers with enforcement and education. As part of the outreach effort, the IRS is providing tips to taxpayers to ensure they are working with a reputable tax return preparer.

The IRS goes on to say that based on the results of the Return Preparer Review, the IRS recommended a number of steps that it plans to implement for future filing seasons, including:

· Requiring all paid tax return preparers who must sign a federal tax return to register with the IRS and obtain a preparer tax identification number (PTIN). These preparers will be subject to a limited tax compliance check to ensure they have filed federal personal, employment and business tax returns and that the tax due on those returns has been paid.

· Requiring competency tests for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents who are active and in good standing with their respective licensing agencies.

· Requiring ongoing continuing professional education for all paid tax return preparers except attorneys, CPAs, enrolled agents and others who are already subject to continuing education requirements.

· Extending the ethical rules found in Treasury Department Circular 230 -- which currently only apply to attorneys, CPAs and enrolled agents who practice before the IRS -- to all paid preparers. This expansion would allow the IRS to suspend or otherwise discipline tax return preparers who engage in unethical or disreputable conduct.

The registering and testing of tax return preparers has been on the radar screen of the IRS for some time.  It will be interesting to see the impact it has on the tax return preparer community, and the potential influx of cases into the IRS Office of Professional Responsibility.

Download Tax Return Preparer Study - IRS

Internal Revenue Service, Office of Professional Responsibility Announces Recent Disciplinary Action

On December 18, 2009, the Internal Revenue Service, Office of Professional Responsibility (OPR), announced recent disciplinary sanctions involving attorneys, certified public accountants, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and appraisers.  These individuals are subject to the regulations governing practice before the Internal Revenue Service, which are set out in Title 31, Code of Federal Regulations, Part 10, and which are published in pamphlet form as Treasury Department Circular No. 230. The regulations prescribe the duties and restrictions relating to such practice and prescribe the disciplinary sanctions for violating the regulations.

I have attached the actual announcement below.  Each and every time these announcements come out they should be a reminder to tax professionals that we must not cross the line.  We as tax professionals owe a duty to both our clients and the government to ensure that we follow the law.  I am certainly not suggesting that we advocate for less tax favorable positions, or give in to certain Internal Revenue Service positions that seem unreasonable or simply not supported by the law.  Rather, I follow the rule that we must interpret and apply the law in a reasonable and good faith manner that allows for the most tax efficient position a taxpayer may take, while avoiding any potential of civil tax penalties.  Over the years, unfortunately, there are certain professionals that simply go too far.

See the announcement below. Download December 2009 - OPR announcement's

Internal Revenue Service Office of Professional Responsibility goes easy on Tax Attorney

The Internal Revenue Service Office of Professional Responsibility recently issued a decision regarding a complaint issued by the Director, Office of Professional Responsibility, Department of the Treasury, Internal Revenue Service, seeking the suspension of a tax attorney for the attorney's involvement in a questionable tax transaction and preparing a tax opinion not supported by the facts and law.  I have attached the decision below and have the following comments:

1. The decision provides a good summary of the various weights of tax opinions, including: (i) more likely than not, which means that there is at least a 51 percent chance that the conclusions in the tax opinion are correct; (ii) reasonable basis, which has a 25 percent chance that the opinions are correct;  (iii) a substantial authority opinion, which means it has about a 40 percent chance; (iv) a should opinion, which has a 75 to 80 percent chance; and (v) a will opinion, which has about a 95 percent chance.   
2. Providing a tax opinion whereby the opinions were intended and were reasonably expected to be a part of a taxpayer's presentation to the IRS in support of a position taken on a return constituted practice before the Internal Revenue Service for purposes of circular 230.
3. The use of the short form tax opinion that summarizes only the facts and conclusions of a particular transaction, versus a long form opinion detailing all of the facts, all of the possible contingencies, and all of the legal issues, caused the complaint to be initiated in the first place. 
4. The administrative law judge ultimately rejected the Director's complaint finding that the tax attorney completed the necessary due diligence, even though it was summarized in a short form opinion and even though it was an abusive tax shelter.  The significance of this decision from my perspective is that the decision highlights that you must continue to follow best practices when providing opinions to clients, which this attorney did for the most part.  That is, complete a thorough review of the facts, review all relevant legal authority, and prepare a well reasoned analysis based upon the facts and law.  I would also add that you should advise the client of the potential penalties that the Service may assess and properly document the scope of the engagement.  And, it goes without saying, that all of this should be in writing.
5. Thus, even though this particular case dealt with a tax shelter that some may argue should have or could have been pursued criminally, the tax attorney was given a pass, mainly because he presented sufficient evidentiary support that he acted in good faith and within the general understanding of best practices for tax attorneys. 

6. See the Office of Professional Responsibility decision attached. Download IRS Office of Professional Responsibility decision

Internal Revenue Service – Office of Professional Responsibility

The IRS's Office of Professional Responsibility (“OPR”) recently published its Guide to Sanctions for violations of Circular 230.  It provides for progressive suspensions, up to and including disbarment, based upon an individual's mitigating or aggravating factors and the number of violations, and current fitness to practice.  According to the Service, in considering whether a corrective sanction is warranted, all relevant factors must be given careful consideration. The Guide to Sanctions provides guidance in determining the proper corrective sanction.  It is not intended to establish a rigid standard or imply that a greater or lesser corrective sanction is inappropriate.

Background

 

According to the Service, choosing a corrective sanction that is reasonable and appropriate for the circumstances involved is extremely important.  All relevant factors must be given careful consideration. The Guide to Sanctions is just that, a guide for determining the proper corrective sanction, and is not intended to establish a rigid standard or to imply that a greater or lesser corrective sanction is inappropriate.  A corrective sanction that is below the range indicated could be appropriate where there are compelling mitigating factors.  A corrective sanction that is above the range indicated could be appropriate for particularly egregious misconduct or for cases where there are significant aggravating factors.

 

Even for offenses where disbarment is not listed, disbarment for a first offense is not precluded. The guide may be deviated from depending upon the individual circumstances that may be involved.  Each case will be considered individually and dealt with on its merits.  Deviations from the guidelines will be documented in the file. Mitigating factors, set forth below, must be considered when proposing and deciding disciplinary and adverse sanctions.  Multiple offenses, offenses which violate more than one section of Circular 230, and repeated offenses normally will be grounds for a more severe sanction than is warranted for a single offense.

 

Disbarment and Other Punishment

 

In general, a reprimand or censure is appropriate where that sanction is all that is necessary to correct the behavior. Where the determination of suspension is 6 months or less, reprimand or censure may be appropriate.  Suspensions up to 24 months are appropriate where a suspension is necessary to bring home to the practitioner the severity of his or her violation of Circular 230. Suspensions in excess of 24 months are appropriate where the misconduct indicates that the practitioner may be perpetrating an on-going harm to the taxpaying community or where the misconduct, for example, multiple instances of violations, indicates a current lack of fitness to practice that would not be rectified by a shorter suspension.  The suggested suspensions are for each individual violation. Disbarment will be sought for any violation where the determination of suspension is at least 5 years.

 

Mitigating Factors

 

A corrective sanction that is below the indicated range could be appropriate where there are compelling mitigating factors.  The following factors must be considered when proposing and deciding disciplinary and adverse sanctions, including:

1.      For tax non-compliance cases, correction of the violation before contact with IRS or the OPR, or within a reasonably short period after contact by OPR;

2.      Illness, incapacitation, or personal hardship of the practitioner, his family or others close to the practitioner, that directly correlate to the action or inaction violating Circular 230;

3.      Personal or professional financial distress correlating to non-payment of taxes, but not non-payment of Form 941 employment tax obligations;

4.      Extrinsic circumstances (e.g., natural disasters) directly correlating to the action or inaction violating Circular 230;

5.      Recognition of action or inaction violating Circular 230 and commitment to future compliance;

6.      For firms, commitment to establishing internal controls to prevent recurrences of the violation;

7.      Preventative measures in effect prior to the misconduct/and or measures put into place after the misconduct to prevent future violations;

8.      Age of allegations.

Aggravating Factors

A corrective sanction that is above the range indicated could be appropriate for particularly egregious misconduct or for cases where there are significant aggravating factors. These factors include:

1.      Failure to respond to OPR contact;

2.      For tax non-compliance cases, failure to correct the issue after contact from IRS or OPR;

3.      For tax non-compliance cases, multiple tax issues related to noncompliance on multiple types of forms in the same tax period, including penalties;

4.      For tax non-compliance cases, sum of money at issue;

5.      Motive, especially those indicating personal gain;

6.      Pattern of action or inaction violating Circular 230;

7.      Assertion of legal arguments previously ruled frivolous by the courts;

8.      Confrontational behavior outside the bounds of zealous defense;

9.      Previous incidents of violation of Circular 230;

10.  Number of offenses;

11.  Failure to understand or recognize that actions constituted a violation of Circular 230;

12.  Negative effect on tax administration.

Multiple offenses, offenses which violate more than one section of Circular 230, and repeated offenses normally will be grounds for a more severe sanction than is warranted for a single offense.